LIVE MARKETS-Surprising winners of the correction: small-caps

20 Min Read

* STOXX 600 back up after U.S. inflation
* U.S. consumer prices rise more than expected
* Market digests Bridgewater shorts on Germany Inc
Feb 14 (Reuters) - Welcome to the home for real time coverage of European equity markets
brought to you by Reuters stocks reporters and anchored today by Julien Ponthus. Reach him on
Messenger to share your thoughts on market moves: julien.ponthus.thomsonreuters.com@reuters.net
SURPRISING WINNERS OF THE CORRECTION: SMALL-CAPS (1626 GMT)
Small and mid-caps are often seen as high beta areas of the market, which are very sensitive
to general sentiment and price gyrations.
But they actually outperformed last week as markets plunged globally - and Eduardo
Lecubarri, JP Morgan's global head of small and mid-cap equity strategy, crunched the numbers to
find this reflects historical patterns.
"Our analysis shows that in continental Europe, the average performance (ex outliers) of
SMid was better than the average performance of large in each of the last 3 US recession-linked
downturns," says Lecubarri.
The recent outperformance could be down to investors' predictions this correction will be
relatively short-lived.
"If you thought this selling pressure was going to last another month but that was it, then
you would look at your portfolio and sell the larger/more liquid names, as that would limit
trading costs," he says.
"In other words, if investors think market downside is temporary, they sell their large
liquid holdings and hold on to the smaller less liquid ones. This means that Smid outperforms on
the way down, and underperforms on the way up."
Small-caps are also likely to be less volatile during sell-offs, he argues, as the amount of
money pooled in passive funds is greater than ever.
"Whenever the next recession becomes apparent and investors around the world start wanting
to lower their exposure to equities, passive funds will sell without any consideration for
company fundamentals. This is bound to increase the volatility of large-caps which are most
exposed to passive funds," says Lecubarri.
(Helen Reid)
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FORGET A SECOND ABOUT BREXIT: IT'S ACTUALLY ABOUT LABOUR (1614 GMT)
When it comes to political risk, investors are now more worried about the fate of Theresa
May and what would come after her, than they are about Brexit divorce negotiations.
"Politics in the UK are now viewed as a greater source of market risk than ongoing Brexit
negotiations," says Barclays in its Brexit Investor Survey.
So what really keeps investors awake at night?
Have a look:
(Julien Ponthus)
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"MARKETS AIN'T GONE CRAZY" (1556 GMT)
In just around 100 minutes of trading the STOXX 600 has recovered all the losses it
made following the strong U.S. inflation data and it has just done something more, hitting a
fresh day high, up more than 1 percent.
"Markets ain't gone crazy," says a Milan-based trader.
The muted reaction on Wall Street to the much-awaited data suggests that the rise in
inflation is seen as benign and given Europe is at an earlier stage of the economic cycle and
ECB monetary policy is still expansionary, its stock market takes the lead, he adds.
The pan-European benchmark index was last up 1.1 percent, while the US S&P 500 index
was edging up 0.2 percent.
(Danilo Masoni)
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TRUMP'S FISCAL STIMULUS TO TRIGGER COLLAPSE, PERMABEAR PREDICTS (1545 GMT)
Sure, a lot of people are saying it, but give SocGen's permabear Albert Edwards some credit,
he says it with style:
"The post-mortem will identify President Trump's ludicrously timed fiscal stimulus as a key
trigger for the collapse," he writes.
For the bearish strategist, today's inflation data backs up the idea that markets should
indeed be worried about inflation.
"This is exactly what the January CPI data outturn provided - in particular the 0.3 percent
monthly rise in core CPI, on the back of a similar rise in December," Edwards argues.
"My view is that this fiscal expansion is probably the most foolhardy escapade in modern
economic policy history. To be sure I agree that US corporate taxation is anomalously high, but
it is the timing of the fiscal stimulus that is utterly ridiculous and will only accelerate the
collapse of US financial markets as the Fed hikes rates even more quickly."
(Julien Ponthus)
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U.S. INFLATION NO GAME CHANGER BUT KEEPS INVESTORS IN CHECK (1501 GMT)
It's probably no game changer, as says ING FX strategist Viraj Patel, but the U.S. inflation
beat sure prompted impressive swings on European and U.S. markets.
As we speak, Europe is comfortably back to where it was before the release prompted a sharp
drop, while Wall Street is only slightly in the red.
"Dow and S&P500 futures tanked after the US CPI inflation numbers beat forecasts, signalling
that this inflation-triggered sell-off could have further to run," says Neil Wilson, an analyst
from ETX Capital.
"In a very nervous market there's little patience" for higher than expected figures, says
Stephane Barbier de la Serre, a strategist at Makor Capital Markets, noting however that there
has been no collapse despite the negative surprise.
The main takeaway from the market is that everything making investors nervous, from rising
rates and inflation to harsher than expected responses from central banks, is here to stay.
"We've seen the best of the cycle in terms of growth and now we have a bit more inflation so
it's normal markets are reacting the way they are," Barbier de la Serre says.
He argues that while there is still some room for the markets to add another 5 percent to
the current correction, there's no reason to anticipate a downward spiral.
The data also fuels a growing sense of bemusement that the U.S. is embarking on an
aggressive Keynesian-style fiscal stimulus push while buoyant employment seems to be already
fuelling inflation.
"Today’s print further highlights the fact that the US economy is not in need of the fiscal
easing that it will get this year," says Ranko Berich, head of market analysis at Monex Europe.
(Julien Ponthus)
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INFLATION BITES, STOXX TURNS NEGATIVE (1346 GMT)
The much-awaited U.S. inflation topped expectations, giving a negative turn to financial
markets and cutting more than one percentage point off the pan-European STOXX 600 index
in less than 10 minutes.
U.S. consumer prices rose more than expected in January, strengthening expectations that
price pressures will accelerate this year and prompt a faster pace of interest rate increases
from the Federal Reserve.
(Danilo Masoni)
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BRIDGEWATER: BETS ON A STOCK MARKET DISASTER? (1256 GMT)
Though the immediate stock market reaction hasn't been huge, traders are digesting the news
of Bridgewater's short bets and interpret them as a broader wager on market stress.
They may be so bearish that they expect a stock market disaster, says an equity sales trader
at a big European bank. But one alternative explanation for these big bets against German names
could be a super-bullish position on the euro - which would imply problems for exporters.
The trader warns against taking the position of a single asset manager as gospel, however,
saying "they're not Buffett".
Another trader says the range of positions is so broad that it's difficult to find a
rationale to it and it may just be a bet on fund flows.
This then opens up a potential explanation why Bridgewater has no shorts on the UK market
(see our earlier blog): it wouldn't make sense to short a market which is already very
underowned.
Why these names in particular? They're quite high beta, meaning they are highly sensitive to
market moves. "It seems they clearly see the DAX / market a lot lower," says a third trader.
(Helen Reid)
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RICHES TO RAGS: TOP PERFORMERS OF 2017 ARE SO 2017 (1233 GMT)
Bitcoin and short volatility were two of the most lucrative trades of 2017, but they've both
reversed considerably so far this year as market turmoil hit.
Credit Suisse's inverse vol ETN XIV was the most spectacular of course, crashing and burning
after last week's volatility spike caused such heavy losses it was forced to close down.
But Bitcoin is also down by more than a third against the dollar from the start of the year,
after a 1,333% gain in 2017. It's declined as regulators around the world ramped up efforts to
control trading in the cryptocurrency.
(Helen Reid)
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SURPRISE! EUROPEAN EARNINGS EXPECTATIONS IMPROVE (1159 GMT)
The latest round of company updates on the old continent has clearly surprised to the upside
and after 15 weeks marred by downgrades there's finally been a big lift to fourth-quarter
European earnings growth forecasts: to 14.6 percent from 11 percent last week.
That's one of the key takeaways of the latest STOXX 600 earnings outlook note from
Thomson Reuters analyst David Aurelio. The other good news is that the ratio of EPS beats in
Europe rose to 50.4 percent from below 50 percent last week and is now in line with the typical
quarter.
The revision has brought Europe to just below the 14.8 percent growth rate expected for the
S&P 500 index. Over in the US, where President Donald Trump's tax cuts are giving a
welcome boost, however, earnings beats stand at an impressive 78 percent.
And what about Germany - today in focus because of headlines about big short bets from
Bridgewater? Well, fourth quarter earnings growth in Europe's economic powerhouse has been
revised upwards to 28.4 percent from 21.8 percent last week.
(Danilo Masoni)
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MATCH OF THE DAY: GERMANY INC. SCORES DATA GOAL AGAINST BRIDGEWATER (1142 GMT)
It didn't take long for Germany Inc. to strike back.
The day after a federal gazette published the shorts taken by Bridgewater against German
corporate titans including Deutsche Bank and BASF, the country of the
Mittelstand struck back with impressive economic data this morning.
"The German growth turbo remains fully activated," Bankhaus Lampe analyst Alexander Krueger
said, while ING took the view that "the same fundamentals which have supported growth in 2016
and 2017 should still be in place in 2018".
Even if Bridgewater's bet was against the euro zone as a whole, today's industrial
production figures don't look like the kind that would inspire a short: the jump was more than
expected and underlined the fastest economic growth rate in a decade.
You could argue however that with a 5 percent decline year-to-date for the DAX, Germany has
conceded an earlier goal to the likes of Bridgewater.
Here's Oliver Kahn, a German who won a game or two in his time:
(Julien Ponthus)
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STOCKS TO FIND A FLOOR AS SENTIMENT HITS 'BUY' SIGNAL (1041 GMT)
Bernstein's composite sentiment indicator is now signalling a strong "buy", having fallen to
a very bearish level of -1.3 standard deviations. The broker's quantitative team says this has
historically led to returns of 3 percent on global equities in the next month, and 5 percent on
a 3-month horizon.
A strong macro background and growing earnings (they see European earnings growing 15
percent this year) also help provide a floor for the market.
Valuations have remained virtually unchanged after the correction, though Europe now looks
closer to cheap on some measures and the U.S. is closer to neutral.
The fact sector and factor valuations haven't budged much adds evidence to the argument this
was an asset class, index level sell-off rather than driven by repricing of specific stocks or
parts of the equity market, Bernstein's Alla Harmsworth and team find.
Correlations rocketed up during the sell-off as stocks moved down in step, but they're
likely to come back down again from elevated levels.
"As volatility subsides but likely settles at higher levels... we expect that the market
will gradually 'come back to fundamentals' again and that dispersion - which tends to follow
implied volatility - will rise," writes Harmsworth.
(Helen Reid)
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IS BREXIT-HIT CORPORATE BRITAIN SPARED FROM BRIDGEWATER'S SHORT? (1024 GMT)
Well apparently: according to the data provided to the UK regulator, there are no
short-positions taken against blue-chip British companies by Bridgewater, as opposed to German
corporate titans, which are among the targets of the world's biggest hedge fund.
According to EU regulations, short positions bigger than 0.5 percent of the capital of an
issuer must be disclosed to the bourse's watchdog.
Check out the data yourself here: bit.ly/2G0fH4C
This comes as a surprise as BAML's fund manager survey pointed out yesterday: "UK equities
have been underowned for 47 consecutive months. Currently global fund managers are net 36%
underweight the region."
Seems unfair for Germany but this could be karma striking back after a German carnival made
fun of how Theresa May is handling the Brexit issue.
(Julien Ponthus, Helen Reid and Reuters' markets team)
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OPENING SNAPSHOT: EUROPEAN SHARES BOUNCE (0818 GMT)
A rise among financials has helped European shares to open in positive territory, led by
Natixis and Credit Suisse, both up around 3 percent following their updates.
Credit Agricole, however, is down 2 percent after its Q4 results.
Even though we're seeing broad-based gains at the open, the STOXX 600 is still stuck at
five-month lows, and trading is likely to be hot and cold with the U.S. inflation figure around
the corner.
Here's your opening snapshot:
(Kit Rees)
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ROSES ARE RED, VIOLETS ARE BLUE, SO BUY THE DIP, WHY DON'T YOU? (0755 GMT)
It's Valentine's day and Citi is telling us that investors shouldn't fall out with equities
just now, even if the incoming inflation data this afternoon is keeping markets fairly nervous.
"Citi Strategists Say Buy The Dip", says their morning note which states that "regional
equity strategists think that this market setback represents a buying opportunity".
"Our Bear Market Checklist agrees, with only 3.5/18 factors flagging sell", it says and
adds: "Investors should stick with equities but hedge their exposure by moving Underweight
credit and long equity volatility once markets have settled".
(Julien Ponthus)
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EARNINGS AHOY! (0746 GMT)
On a busy day of earnings, especially for the banking sector, here's a round-up of the key
headlines on the company and macro front so far this morning:
Credit Agricole says its French retail bank has reached turning point
French bank Natixis posts surprise rise in quarterly profit
Credit Suisse posts third straight annual loss on US tax writedown
Steel unit boosts Thyssenkrupp profit ahead of Tata Steel tie-up
Salmon farmer Marine Harvest to cut costs as earnings, dividend drop
H&M sees profit rise in 2018 as online sales grow
Haldex Q4 core profit rises, says heavy investment to dent 2018 margins
Clariant 2017 profit misses estimates after turbulent year
Dutch chemical firm DSM's Q4 profit beats expectations
Bilfinger sees further organic growth in orders in 2018
Food group Danone to sell 14 percent stake in Japan's Yakult
Moncler launches 'Genius' creative hub in new product strategy
BUZZ-EDP: Possible takeover target for Gas Natural - CS
BUZZ-Ferrari: SUV and EV strategy adds risk - MS
German exports drive solid growth in fourth quarter 2017
Coca Cola HBC AG Posts 4.9 Pct Rise In ‍Reported FY Net Sales Revenue
Sky wins bulk of Premier League rights as value slips
British construction group Galliford Try looks to raise 150 mln stg
Spreadbetter Plus500 sees 2018 revenue ahead of market expectations
(Kit Rees)
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WHAT'S ON THE RADAR AHEAD OF THE OPEN (0730 GMT)
European markets are expected to open in positive territory but all eyes are really on the
U.S. inflation data, which will come in early afternoon and will determine the fate of this
session.
In the meantime, a steady flow of corporate results and M&A will give traders enough to gnaw
on while waiting for the big numbers.
In the banking sector, Credit Suisse posted a third straight annual loss but it was smaller
than expected. Credit Agricole saw a 33 percent jump in quarterly profit while French investment
bank Natixis last evening reported an unexpected rise in quarterly net profit.
For cyclicals, Thyssenkrupp Q1 operating profit is up 35, Dutch chemical firm DSM's Q4
profit beat expectations and Clariant 2017 profit missed estimates after a turbulent year.
Swedish brake systems maker Haldex reported a rise in fourth-quarter core earnings but said
investments in development and expansion in North America and China would hold back
profitability in 2018.
M&A: Danone to sell 14 percent stake in Japan's Yakult.
In the UK, Sky won the bulk of Premier League rights.
(Julien Ponthus)
*****
EUROPE TO OPEN IN POSITIVE TERRITORY, FUTURES INDICATE (0705 GMT)
Looks like European bourses are set to open on a positive note, but of course, the rest of
the session is largely expected to depend on the U.S. inflation data, which is to be published
at 1330 GMT.
(Julien Ponthus)
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A "POWELL PUT"? (0657 GMT)
The incoming U.S. inflation data is sure keeping markets on their toes and it's interesting
to note that the new Federal Reserve Chair Jerome Powell's first words at a ceremonial
swearing-in was that the central bank would keep watching for financial stability risks.
"We will remain alert to any developing risks to financial stability", Powell said on the
heels of a market rout that shaved 10 percent from the value of major U.S. stock indexes.
A lot of analysts are still trying to figure out how Powell would react to a melt-down and
wondering whether there would be such as thing as a "Powell Put", in the same way that the
so-called "Greenspan Put" came to the rescue in 1987.
On Monday, Stéphane Déo, strategist for LBPAM, asked himself whether the "Greenspan Put" had
disappeared and what to make of the old saying recently used by Bank of America Merrill Lynch
analysts: "Markets stop panicking when central banks start panicking".
In the meantime and as far as we are concerned today, as said Greg McKenna, chief market
strategist at CFD and FX provider AxiTrader: "Even a slightly higher number could set the cat
among the pigeons given the late cycle stimulus the Trump Administration is pumping into the
U.S. economy".
(Julien Ponthus)
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MORNING CALL: SLIGHTLY UP AHEAD OF U.S. INFLATION (0615 GMT)
Good morning and welcome to Live Markets.
Early indications from spreadbetters point to Europe opening slightly in positive territory
after a mixed session in Asia. All eyes however are on the U.S. inflation data which could
soothe, or inflame, fears of faster rate hikes globally.
London's FTSE is seen opening 15 points higher, Frankfurt's DAX 46 points higher and Paris
CAC up 17 points.
(Julien Ponthus)
*****
(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)